SB234, The Startup Killer: An Update

10 Jun 2011

Tags: sb234 startup killer bill affiliate tax nexus tax affiliate marketing entrepreneurship startups

If you are reading this, are a California resident and already know you want to oppose SB234, go to Voter Voice and fill out this form; it will send a letter to your representatives in California that you oppose the bill. Please go into detail about how it can harm your business - it makes a big difference!

Update on SB234

So, for those of you not familiar with it, the Loni Hancock of the California State Senate introduced bill SB234, a bill that attempts to establish “nexus” (a physical presence for tax purposes) for out of state retailers. The goal of the bill is to give the California Board of Equalization an extremely broad mandate to determine arbitrarily what defines nexus.

So, What Now?

Now, what does nexus mean? It means that an out-of-state retailer would need to collect sales tax online if they sell to California residents if they are found to have nexus.

Not many people know that in California you are required to report on your taxes any out-of-state transactions online that you make which are subject to sales tax, as well as pay said tax on them. No one does it. At the same time, a minority of small bookstores have frequently pointed at Amazon.com as the bogeyman to blame for their declining sales. Several similar bills which target Amazon specifically have been introduced that attempt to define affiliate marketers as the nexus; these bills have been largely ineffective as Amazon (and any other online merchant so affected) simply terminate relationships with affiliates once the bill passes and the state collects no money. I won’t bore you with the details as the Performance Marketing Association sums up the affiliate nexus tax far better than I can anyway and I’ve also summed up the whole thing in a previous post if you want more details.

So What Is The Difference?

Anyway, unlike the other two bills that have been introduced in California, AB153 and AB155, SB234 is a special beast. The bill has no language about affiliates at all; it instead gives a completely vague mandate which could allow nearly any manner of electronic representation to be considered nexus.

The worst part of all of this is that the bill, supposedly to “level the playing field for main-street businesses” is actually pushed heavily by Wal-Mart, Target, Home Depot & Best Buy. Last I checked, they pretty much ran main-street out of business. 

Now, as a founder of a startup with affiliate marketing as my “day job”, this bill is especially terrifying. If you have a service which hosts information for an out of state retailer, you could be considered their nexus. If you are a contractor for them, you could also be considered their nexus. The door is so wide open, that it clearly says “don’t do business with companies in california”. Furthermore, it can really damage the future of your business as well; potential strategic partnerships could be lost, buyouts may not be made. In general, it really is what I consider a “startup killer bill”.

The Current Situation

On Monday, June 27th the bill will be heard by the Assembly Revenue & Tax Committee. This is the most critical time of all: a big startup & VC contingent will go a long way to swaying the committee to vote against it.

The sponsor (person asked to carry the bill) in the Board of Equalization, is Betty Yee. Two other committee members, whose constituents are in the heart of Silicon Valley, are Rich Gordon and Jim Beall. These people need to understand just how much this bill can impact the startup community in California. Please reach out to them directly if you are in their districts as soon as you can.

_Right now people need to go to Voter Voice and fill out the form letter to voice their opposition. Please help spread the word so that others know as well. Laws like these set a dangerous precedent; we need to help squash them before they spread. Any effort you make can have a big difference! _